Domestic power bills have risen substantially across Australia over the last decade, but some relief is in sight with prices expected to fall by an average of 7.1 per cent between 2018-19 and 2020-21. Find out more about what makes up your bill and what we can do bring prices down.

What do you pay for in your electricity bill?

Simply put, we pay for four main things – the generation of electricity, the poles and wires to get the electricity to homes and business, electricity company administration and marketing costs, and environmental costs.

Generating electricity (wholesale power)

The cost of actually generating energy – whether from renewable energy, coal or gas – makes up almost 39 per cent of the cost of the average bill. This is known as the wholesale electricity price.

The wholesale price of power has risen in recent years due to a couple of factors. First, the rising cost of producing power from gas and secondly, the closure of several old and inefficient coal power plants in South Australia and Victoria.

However, the wholesale electricity price is expected to decrease by an annual average of 11.6 per cent from 2018-19 to 2020-21 as more than 8500 MW of new large-scale renewable energy generation enters the market to ease supply-side pressures.

Poles and wires

Australia has one of the longest electricity networks in the world. The cost of the poles and wires that carry the electricity from power plants to our homes and businesses is passed through to us in our power bills.

Keeping our poles and wires well maintained and building new parts of the electricity network is not cheap. In 2018-19, these costs accounted for 44 per cent of the cost of the average electricity bill.

Electricity company administration and marketing costs

This part of our bill covers the cost of maintaining customer databases and billing processes at electricity retail companies, as well as marketing to win new customers.

While a study in September 2017 by the Australian Competition and Consumer Commission into electricity prices across the National Electricity Market found that electricity company costs accounted for about a quarter of the average residential electricity bill, a 2018 study by the Australian Energy Market Commission suggested that these costs made up 12 per cent of the average electricity bill in 2017-18.

Environmental costs

This is the smallest component of the average bill. It includes the cost of meeting the national Renewable Energy Target, as well as the ongoing costs of rooftop solar power support schemes. The cost varies from state to state. According to a 2019 study by the Australian Energy Market Commission, the cost of environmental schemes makes up about 7 per cent of the average bill. However, now that the Renewable Energy Target has been met, environmental costs are expected to fall significantly in the next few years.

Average annual national electricity bill ($AUD)^

Why have prices risen in recent years?

A variety of different factors have contributed to price rises. Some of these include:

A lack of national energy policy beyond 2020. This means that business does not have the necessary certainty to invest in the new infrastructure needed to replace the old power plants which are retiring.

Rising network costs were a big factor in price rises from 2007-2014, but have since fallen.

Increased charges by energy retailers for winning and billing customers.

The export of gas reducing the amount of gas available for local companies, which makes it more expensive. In some cases this means Australian gas is cheaper to buy in Japan than it is back home.

The retirement of large old coal-fired power stations with not enough new power generation to replace them.

Game playing by power plant operators in the wholesale electricity market and not enough competition to help reduce prices.

In 2019, the federal government introduced a number of measures to curb power prices, including:

the Default Market Offer, which sets a price cap for electricity retailers’ standing offers and serves as a price comparison point for market offers

the “Big Stick” legislation, which gives the government powers to punish electricity retailers that fail to pass on savings to consumers or manipulate the market, and even force the divestiture of a retailer’s assets.

While questions have been raised about how effective these measures will be and whether they are needed, they will help consumers find the best possible electricity deals and ensure that retailers are acting in the interests of their customers.

Modelling conducted by ACIL Allen as part of the Federal Government’s Renewable Energy Target review also found that the average household electricity bill would be lower in the future with the target in place than without it.

This is because less renewable energy generation means we need more gas, which the Australian Energy Market Operator forecasts to increase in price by 48 per cent over the next 20 years. A variety of energy sources also means more competition in the electricity market – and as in any market, competition helps keep prices down.

Now that the Large-scale Renewable Energy Target has been met, its impact on electricity bills will fall dramatically from $30 in 2019-20 to just $13 in 2021-22. In addition, the Small-scale Renewable Energy Scheme’s contribution to electricity bills will continue to fall each year as it approaches its conclusion in 2030.

What can we do to combat rising electricity prices?

Aside from establishing a bipartisan national energy policy, the best thing we can do to combat rising electricity prices is to reduce or better manage ‘peak demand’.

Peak demand refers to the small number of times each year when very high amounts of electricity are used – usually the hottest few days of summer. As we build more houses and install more air-conditioners, the demand for electricity on these very hot days goes up, and we need to build more power plants to avoid blackouts.

These new plants come at a considerable cost to consumers, even though they might only be used for a few hours a year (over the whole of 2012, the electricity network experienced peak demand for less than 40 hours). Energy policy experts generally agree that building additional power plants specifically to meet the small number of peak demand periods every year is the most expensive way to deal with the issue.

So what’s the solution? Clean energy sources like solar and energy storage and can help reduce strain on the electricity network during peak demand times, while demand response and energy efficiency measures can also make a big impact in reducing peak demand.

The increasing uptake of rooftop solar panels is already playing a major role in managing peak demand on hot summer days. The technology’s growing contribution was particularly evident during the January 2019 heatwave, when it reduced peak demand across the National Electricity Market by almost 2800 MW.

There is also substantial scope for different types of ‘smart’ power demand management to help reduce peak demand. These can include remotely cycling air-conditioners on and off, incentivising large energy users to use less electricity when demand is high and a system that charges different rates for power use during peak periods.

By better managing peak demand, we can reduce the need to build expensive extra power infrastructure and help ease the pain of residential power prices.